THE IMF’s criticism of Pakistan’s reckless budget for fiscal year 2023-24 carries profound risks for the economy. The June 30 deadline for meeting the lender’s conditions to unlock funding will likely be missed unless the government agrees to review the document and remedy its weaknesses.
It would not be surprising if it does so, considering that it had to hurriedly, but comprehensively, revise its budget for the outgoing year to accommodate the IMF’s concerns for the resumption of its funding programme when Miftah Ismail was at the helm of the finance ministry.
Responding to the Fund’s concerns, Finance Minister Ishaq Dar told senators yesterday that Pakistan “cannot accept everything from the IMF”. So, what would be the consequences if the government fails to pull off the deal? In the best-case scenario, Pakistan would struggle throughout the next fiscal to seek bilateral debt relief and secure fresh loans and rollovers of existing ones to meet its external debt obligations of $23bn.
Even if it succeeds in getting concessions from bilateral lenders and new loans from friendly countries, these will come at the cost of further economic slowdown, the loss of more jobs and higher inflation. In the worst-case scenario, Pakistan will default on its debt, something the government has tried to prevent by choking economic growth.
Moody’s has also warned that Pakistan’s failure to restart its $6.7bn bailout programme with the IMF is pushing the country closer to defaulting. “There are increasing risks that Pakistan may be unable to complete the IMF programme,” a Moody’s analyst was quoted as saying. Without an IMF programme, Pakistan could default, given its very weak reserves, Moody’s said, hours before the IMF made public its reservations on Wednesday night.
The IMF has criticised the budget on multiple counts, ranging from unfair tax policies that “missed an opportunity to broaden the tax base”, to tax amnesty for a money-whitening scheme through remittances that runs against the programme’s conditionalities and governance agenda.
The criticism wasn’t unexpected as most financial analysts had ruled out the Fund’s approval of the expansionary budget. The statement issued by the IMF’s resident representative for Pakistan shows that the Fund is still willing to “work with Pakistan in refining this budget ahead of its passage”.
Some argue that cooperating with the Fund could give the government another chance to put its fiscal house in order to conclude the review before the expiry of the programme. Pakistan’s current crisis is driven mainly by external debt obligations. Hence, strict import controls have failed to improve foreign exchange reserves.
What the government needs to understand is that falling reserves, uncertainty around the IMF programme and policy inaction is adding to the crisis. Unless the IMF is on board, our debt distress will only increase.
Published in Dawn, June 16th, 2023